BUDAPEST - THE Hungarian central bank cut its key interest rate by half a percentage point to 10.0 per cent on Monday, its second such move in two weeks.

The decision to cut the two-week deposit rate was due to 'the expected economic slowdown and strong disinflation,' the bank said in a statement.

The rate cut, which was expected by analysts and would take effect on Tuesday, was announced during the scheduled December meeting.

But Monday's action was only approved by a narrow margin, the governor of the National Bank of Hungary governor Andras Simor said after the meeting.

'A rate cut beyond 50 points would have jeopardized Hungary's hard-won return to financial stability,' he added.

The central bank meanwhile said it foresaw further rate cuts if 'the continuity of capital flows and the stability of the financial intermediary system allow'.

Monday's decision was in line with analyst and market expectations and the local exchange rate remained practically unchanged after the decision, at around 266 forint to the euro.

'The fundamentals allow for aggressive rate cuts because the economy is expected to fall into recession and inflation could easily undershoot the target,' said Ms Mariann Trippon, an analyst with CIB Bank.

Another analyst at ING Bank, Mr David Nemeth, added: 'The central bank will continue to cautiously lower the rate, which might end up at 7.5 per cent at the end of the following year.'

As the global financial crisis unfolded, Hungary emerged as one of the most vulnerable economies owing to its large external debt, reliance on external financing and high level of foreign currency borrowing by its citizens.

As a result, foreign investors, seeking to reduce their risk exposure, piled out of forint assets and the Hungarian currency lost more than 20 perc ent of its value by the middle of October, selling for a record low of 285 forints to the euro.

The central bank reacted by raising the key interest rate on October 22 by a full three percentage points to 11.5 per cent in a bid to protect the Hungarian currency.

The country also secured an International Monetary Fund-led lifeline of 20 billion euros (S$36.3 billion) at the end of October to protect it against state bankruptcy.

Since then, the central bank has lowered what was the highest rate in the European Union by 0.5 percentage points twice, on November 24 and December 8.

With Monday's decision, it has now rolled back half of the emergency hike.

Whether the Hungarian central bank can continue to cut the two-week deposit rate depends on the forint, the rate of which reflects investor confidence in Hungary, bank governor Simor said in the weekly Magyar Narancs on December 18. -- AFP